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Goldman Sachs Predicts Re-rating for Private Banks as Earnings Growth Gains Momentum
- •Goldman Sachs expects India's private banking sector to undergo a re-rating over the next one to two years driven by improving earnings and stronger revenue growth.
- •Analyst Sumeet Kariwala noted that earnings estimates for private banks are finally being upgraded after years of consecutive downgrades.
- •Core pre-provision operating profit growth is projected to accelerate to 17 percent, up from the current 9 to 10 percent pace.
- •Profitability has previously been pressured by slower low-cost deposit growth and tighter operating environments, falling by 70 basis points over four years.
- •Larger and stronger banks within the sector are expected to stand out and deliver positive surprises during this next phase of growth.
Key Questions Answered
Goldman Sachs expects private bank stocks to experience a re-rating over the next one to two years due to improving earnings, stronger revenue growth, and better operating leverage after several years of weak performance and earnings downgrades. Higher interest rates and a favorable interest rate cycle are also expected to support bank margins and profitability.
Goldman Sachs favors ICICI Bank as its top pick because of its early start to a customer-centric approach, superior organizational structure, and multipurpose branch ecosystem. Additionally, the brokerage sees Kotak Mahindra Bank as having strong turnaround potential.
Private banks can boost their profitability by increasing employee and branch productivity, adopting an ecosystem-led retail banking strategy, and selectively taking on more risk while strengthening underwriting and collections. Goldman Sachs estimates that these strategic initiatives could enhance profitability by 40 to 45 basis points over a three-year period.
